 Income tax 2021-2022, business expenses, rent expense. Get ready to get refunds to the back, dive in into income tax 2021-2022. Most of this information can be found in Publication 334, tax guide for small business tax year 2021 tax formula, line one income. We would have a sub-schedule, basically an income statement with income and expenses. We're basically focusing in on expenses, expenses basically being deductions, the net then rolling in to line one of the formula as well as page one of the form 1040, line number eight that we see here, we would have the schedule C, the income statement, in essence, rolling into the schedule one, rolling into page one of the form 1040, line eight that we see here, here is the schedule C, profit or loss from business, basically an income statement. Remember that we're looking on the expense side of things, expenses that are specifically related to the schedule C, business expenses as opposed to expenses elsewhere, expenses being needing to be ordinary and necessary as a general rule to be deductible on the schedule C. Now we have the rent expense. Rent is any amount you pay for the use of property you do not own, so we don't own the property, we're using the property, why are we using it? To make money and therefore it's a business expense. So in general, you can deduct rent as a business expense only if the rent is for property you use in your business to make money. So if I added that, but in any case, that's how it is. So if you have or will receive equity in or title to the property, you cannot deduct the rent because if you're basically going to be receiving the property, then it sounds more like in form, you're making a payment to purchase the property. So that's when you get into these kind of agreements that get a little bit tricky with regards to a substance versus form argument. In other words, you write up the documentation as if it's a rent documentation when what is actually happening is a purchase is happening in that case. So you get into whether you have to capitalize like large pieces of property for example, or whether they should be written off in terms of an expense. So a couple kinds of things that you wanna keep in mind with regards to expense. One, if it's a straightforward rental kind of contract in substance and form and it's for something that's business related, then you would think it would be fairly clearly falling under the ordinary and necessary items which could be deductible then on the Schedule C. Then we have the issue of a substance versus form kind of situation. For example, if we're purchasing something large like a piece of property or like a car or something like that where the contract is set up in form to be a rental type of agreement, but in actuality, if you look at the substance of it, it looks more like a purchase, in which case you may have to treat it as what it actually kind of is, not what it is in just like the form of it, which would be a purchase, be capitalizing it possibly having to treat whatever you're purchasing as an asset as opposed to writing off the rent. That is gonna be significant because you can imagine this thing coming up with like automobiles for example, where if you purchase the car, then you can imagine a situation where the tax code has make forces you to put it on the books as an asset and then you basically have to depreciate that asset over a long period of time. Whereas if you qualify it as a rental kind of thing, a lease or something like that, then you can write off the lease payments. So now you can compare and contrast whether the lease payment kind of system would be better for tax deductions than like the depreciation if you made the purchase. And you can imagine a situation where you in essence purchased the car, but you set it up as a lease because you like the format for whatever reason of writing off the lease amounts as opposed to the depreciation related to the car possibly due to the timeframes that you have to basically write off the car. So that's where you get into the substance versus form kind of arguments. And then we have the other thing that often comes up with these kinds of expenses, any kind of business expense is, is it a personal expense or is it a business expense and is there overlap between the two? Normally you wanna keep those two things separate, but sometimes you can't. For example, if you rented something like your home, if you're renting your home and you use your home as a home office, then part of that home office might be deductible and part of it might not be deductible because it would be personal versus the business usage of it. So we have the unreasonable rent. So you cannot take a rental deduction for unreasonable rent. So that seems kind of normal because if it was unreasonable rent, you probably wouldn't be going into the contract for unreasonable rent unless there was something weird going on like a family kind of transaction that was put in the place possibly for tax reasons or something like that. So ordinarily the issue of reasonableness arises only if you and the leaser are related. So you can imagine situations, if you're in a situation where you're dealing business with someone that's not your family, then you're at kind of like an arm's length transaction, we kind of call it a normal market transaction with two self-interested people that don't have interests aligned that are both self-interested so that you would think that the price would not be unreasonable in that case. But if you're related, you can imagine all other kind of weird things going on, for example, just trying to lower the tax bill and charging unreasonable rent in order to do that in like a family context or something like that. So rent paid to related person is reasonable. If it is the same amount, you would pay to a stranger for the use of the same property. So what if you wanna deal with your family, then can I not deal with my family in that case? No, you can, but you gotta be careful when you're setting up the contracts to see if they're valid contracts for taxes and so on, because you gotta make sure that they're set up with basically market terms related to them in order to qualify as valid contracts generally. So rent is not unreasonable just because it is figured as a percentage of gross receipts. Related persons include members of your immediate family, including brothers, sisters, either whole or half, your spouse, ancestor, and lineal descendants for a list of other related persons. You can see section 267 of the internal revenue code. I'll rent on your home. If you rent your home and use part of it as your place of business. So here's the other kind of confusing part. I got my home. I work out at my home. Part of my home is my office. So now what do you do? Well, now you got rent on the home. It's just like if you had the mortgage interest on the home that we looked at before and we'll look at more when we get into basically the business use of the home itself. But we gotta do some allocation stuff here between the Schedule C deduction and possibly anywhere else. If you were able to deduct anywhere else, if it was your home and you purchased it, then you're talking interest that you could possibly deduct mortgage interest on the Schedule C and possibly also the rest of it on Schedule A. But if you're a renter, then you might not be able to deduct any other place and you'd be able to. But maybe you could get the business use of the home rental deduction on the Schedule C for the office portion. So you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home. For more information, you can see business use of your home later. Our rent paid in advance. So here's the other kind of issue where you might get into your mind, hey, I'm a cash basis taxpayer and I wanna lower my income this year. So why don't I just pay for like the next five years of rent in the current year and that kind of, I'm shifting then the cash basis when I pay for it and that's different than when I use the property and the IRS will be skeptical of that. So they might put a restriction into it. So generally rent paid in your business is deductible in the year paid or accrued. If you pay rent in advance, you can deduct only the amount that applies to your use of the rental property during the tax year. So they're saying we don't like that prepayment stuff. We think you're cheating us here. So they're gonna put a restriction on that. So you can deduct the rest of your payment only over the period to which it applies. More information for more information about rent C chapter three of publication 535. You can find that on the IRS website, irs.gov, irs.gov, go v, irs.gov.